Renovate America continues to stretch its regional footprint through its fourth securitization this year of Property Assessed Clean Energy (PACE) bonds supporting green-energy home improvements.

In HERO Funding 2016-4, the San Diego-based PACE program administrator is pooling a targeted balance of $292.4 million in limited obligation bonds issued by three local California entities covering 36 counties to help finance solar panel installations and other energy-efficiency upgrades for homeowners.

The areas being served is the largest swathe of counties Renovate America has included among its nine HERO platform securitizations to date since it began structuring PACE bond-backed deals two years ago. The previous transaction in September involved bonds secured by property tax assessments in 34 counties – with both a far cry from the inaugural HERO deal in 2014 that pooled PACE bonds from a single Southern California county (Riverside).  

The latest transaction includes two classes of senior notes: a $183.6 million class A1 tranche and a $100 million Class A2 series, both carrying preliminary ‘AA’ structured finance ratings from Kroll Bond Rating Agency and DBRS.

The company’s previous securitization, HERO 2016-3 in September, had similar ‘AA’ ratings from Kroll and DBRS.

The transaction’s collateral includes $204.7 million of PACE bonds issued by three local California government entities whose bonds have been the subject of previous HERO securitizations – the Western Riverside Council of Governments, San Bernardino Associated Governments and Los Angeles County – as well as $87.7 million of subsequent PACE bonds that will be added by the trust following the current deal’s close.

PACE is a program that finances energy efficiency upgrades of renewable energy installations for residences and commercial buildings. HERO 2016-4’s bonds are secured by an initial pool of 9,008 PACE assessments levied almost entirely on single family homes. While the 36 countries is its widest reach in a HERO transaction this year, it’s the smallest number of assessment accounts in a collateral pool among Renovate America’s 2016 deals.

In PACE programs administered and financed by companies like Renovate America, government bodies issue bonds to fund for the homeowners’ improvements (which average $22,723 in this latest ABS) and are repaid via a twice-annual assessment on the owner’s property tax bill.  The proceeds from the bond sales provide the entities additional money to fund further PACE assessments for other borrowers.

The programs are not without controversy. Many mortgage lenders oppose the PACE program because it creates first-position lien of the assessment ahead of the mortgage itself in terms of claim priority in the event of a default.

The Department of Housing and Urban Development has endorsed Federal Housing Administration guarantees on mortgage loans with attached PACE assessments; but on the other hand, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, is opposed. The lack of cooperation from Fannie and Freddie can complicate refinancing or resales of the PACE-assessed properties, since neither agency will guarantee a loan with a priority PACE lien in place.

LA County is the largest source of the assessments with 31.2% of the pool. The assessments carry a weighted average interest rate of 7.99%, which is slightly higher than Renovate America’s previous deals and supports a “significant” excess spread over the expected price of the notes at around 4.5%, according to KBRA.

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